June 30, 2014
Financial Services Agency

FSA Launches Field Tests of Economic Value-Based Solvency Regime

The FSA has decided to conduct field tests covering all insurance companies, with the aim of introducing economic value-based solvency regime.

A summary of the tests is as follows:

1. Purposes and Objectives

• Under the global circumstances in which economic value-based solvency regime can contribute to recognizing the financial condition of an insurance company appropriately and lead to enhancement in risk management by insurers, the discussion towards the introduction of such regime is being developed at organizations including the IAIS (International Association of Insurance Supervisors).
• In Japan, the FSA conducted field tests covering all insurance companies in June 2010 and recognized the practical problems, etc., with the aim of introducing the economic value-based solvency regime. Accordingly, the FSA is currently considering introducing the economic value-based solvency regime, as the FSA proclaims in its Annual Supervisory Policies for Insurance Companies, etc. in 2013 that the FSA will continue to consider introducing a regulatory regime in the light of relevant international discussion trends.
• Based on those circumstances, the FSA will again conduct field tests that include trial calculations of the economic value of insurance liabilities, etc. for all insurance companies, to comprehend to what practical extent insurance companies are dealing with the calculation of insurance liabilities on an economic value basis. Findings obtained in the tests, including any practical issues, will be taken into consideration for the introduction of the economic value-based solvency regime.

2. Overview

• In a questionnaire, all insurance companies are requested to  (1) calculate the value of insurance liabilities based on economic value and (2) measure risks such as interest rate risks, considering assets and liabilities comprehensively, and (3) submit a report on any findings  practically encountered.
• Calculation methods and assumptions, such as interest rates and risk coefficients provided  by the FSA, are used. The calculation methods are generally consistent with those being examined by organizations such as the IAIS and other jurisdictions, including the EU.  As to the confidence level for the calculation of risks, 99.5% is applied under this test, considering the economic value-based solvency regime in the EU, etc.
• For advanced insurers that have already used internal models, etc. and have managed their risks voluntarily based on the economic value of insurance liabilities, an additional questionnaire regarding, for example, the actual operation of internal models is carried out.
• After the reports are collected and put together, a summary of the tests, including general tendencies and any issues identified in the process, will be made public.  Note that  the results of individual companies will not be made public.

3. Time line

June 2014: All insurance companies to be requested to conduct field tests

May 2015 (target timing): A summary of results to be made public